2024-01-11 13:23:25 ET
Summary
- Palantir Technologies Inc. trades at generative AI valuations, but does not have generative AI growth - what's wrong?
- I discuss why analyzing customer count may help predict future accelerating growth.
- Palantir has a net cash balance sheet and is GAAP profitable.
- I reiterate my buy rating for this long-term AI winner.
Palantir Technologies Inc. ( PLTR ) has returned to being one of the most richly valued tech stocks, and much of that is deserved. The company has turned in four consecutive quarters of GAAP profitability, maintains a net cash balance sheet , and appears positioned to reap the rewards of growing generative AI adoption. The only issue? Revenue growth has yet to accelerate, even as typical generative AI names like Nvidia ( NVDA ) continue to show hypergrowth.
Investors should remain patient as the tough macro environment may be holding back growth in IT budgets, with the real generative AI growth yet to come. In the meantime, investors can look at the strong Palantir customer growth as a potential leading indicator of future revenue growth. While the stock does not appear cheap based on current growth rates, the strong balance sheet and GAAP profitability make it easy to wait for an inevitable acceleration in top-line growth.
PLTR Stock Price
PLTR has surprisingly been left out of the tech sector melt-up of the past few months, but the stock has been a strong performer over the past year.
I last covered PLTR in September, where I rated the stock a buy due to my belief that an “Nvidia moment” is coming. I can’t blame investors for being impatient on waiting for an acceleration in growth, especially with the stock trading at current valuations.
PLTR Stock Key Metrics
In its most recent quarter , PLTR delivered 17% YoY revenue growth to $558 million, narrowly exceeding guidance for up to $557 million. Government revenue was modest at 12%, with commercial revenues accelerating sequentially to 23% YoY growth.
PLTR saw even faster growth among U.S. commercial customers, with revenue growing 33% YoY.
PLTR saw its net dollar retention rate decelerate further to 107%, down from 110% in the quarter. Management blamed the deceleration on headwinds from European customers.
Many investors might consider PLTR to be richly overvalued, given the slow top-line growth. There’s two counterpoints to make here.
First, PLTR has made great strides in boosting profitability. The company generated $163 million in adjusted operating income in the quarter, comfortably surpassing guidance for $139 million.
The company has even generated positive GAAP net income for four consecutive quarters, making the company eligible for inclusion in the S&P 500 (SP500).
Second, while PLTR has seen modest revenue growth, it has continued to show aggressive growth in customer count. The company saw total customers grow by 8% sequentially, one of the highest growth rates in the tech sector.
It is not atypical for PLTR to be showing materially faster customer growth than revenue growth. The company delivered 55% growth in commercial customers in the fourth quarter of 2022 versus 11% commercial revenue growth, and 200% growth in commercial customers in the fourth quarter of 2021 versus 47% commercial revenue growth. The company has long been considered a coiled spring, in which it takes time for its customers to fully understand how to maximize the value of the product. PLTR CEO Alex Karp has famously declared that they had not yet come up with a monetization strategy and instead aim to first take market share in artificial intelligence. Eventually, I expect an improving macro environment to be the necessary catalyst for PLTR to show accelerating top-line growth.
PLTR ended the quarter with $3.3 billion of net cash, which together with the GAAP profitability make for a bulletproof balance sheet.
Looking ahead, management is guiding for the fourth quarter to see revenue growth of up to 18.5% YoY growth, representing slight sequential acceleration as well as another quarter of positive GAAP net income.
On the conference call , management mentioned how they had changed their go-to-market approach for AIP boot camps (their generative AI product), which has sped up their ability to “deliver real workflows” from one to three months down to as fast as “five days or less.” Management notes that they will conduct bootcamps for “more than 140 organizations by the end of November,” and I again point to their total customer count of 453.
While generative AI has increased the attention to PLTR’s commercial business, management noted that they expect their U.S. government business to accelerate beyond the current 10% YoY growth rate, due to “increasing demand for those products to support our allies around the world.” That would help accelerate overall growth, given that government revenues still make up over 55% of overall revenues.
Is PLTR Stock A Buy, Sell, or Hold?
PLTR is an enterprise tech company widely considered to be a pure-play investment on the growth of artificial intelligence. Prior to 2023, PLTR was often considered to be ahead of its time, which is a polite way of saying that customers were not ready for the product. Generative AI appears to have addressed that overhang, and PLTR has embraced the rising trend with an aggressive go-to-market strategy that has prioritized growing total customers over revenues.
PLTR appears to have earned a large retail investor following, as evidenced by the rich valuation. Even analyst Dan Ives has called the company the " Lionel Messi of AI ." The stock recently traded hands at 16x sales, a lofty multiple given the modest top-line growth.
PLTR trades at 66x adjusted earnings, but earnings are expected to grow rapidly due to operating leverage.
I still expect PLTR to see top-line growth accelerate to the 30% to 35% range over time upon an improving macro environment. Assuming just 25% top line growth, 35% long term net margins, and a 1.5x price to earnings growth ratio ("PEG ratio"), I see fair value hovering around 13x sales. That would imply solid double-digit upside over the next decade, given the long growth runway of this thesis. I note that PLTR’s net cash balance sheet and GAAP profitability help to lower the required valuation hurdles here.
What are the key risks? The biggest risk here is that of management execution. It is possible that revenue growth does not accelerate or does not accelerate as much as projected. It is also possible that any acceleration proves short-lived and does not persist for as long as projected. While I view PLTR to have the top artificial intelligence product offering in the market today, I am unable to back that view with subjective analysis, and I note that the cloud titans are formidable competitors.
Another risk is that of valuation. Being one of the most richly valued stocks in the market, PLTR may have greater downside risk in the event that negative sentiment returns to the tech sector or market overall. While I am of the view that tech stocks have earned higher valuations due to their strong financial results in the past year, that sentiment can always turn and in PLTR’s case, reduced hopes for accelerated growth is a unique risk.
I reiterate my buy rating for PLTR, though caution that one should expect heighted volatility due to the stock trading at the upper end of its fair value range.
For further details see:
Palantir: Leading Indicators, Coiled Springs, And Capitulation